Risk management in Indian banks is a relatively newer practice, but has already shown to increase efficiency in governing of these banks as such procedures tend to increase the corporate governance of a financial institution. In times of volatility and fluctuations in the market, financial institutions need to prove their mettle by withstanding the market variations and achieve sustainability in terms of growth and well as have a stable share value. Hence, an essential component of risk management framework would be to mitigate all the risks and rewards of the products and service offered by the bank. Thus the need for an efficient risk management framework is paramount in order to factor in internal and external risks.
Risk ratio would be defined as the ratio of the probability of an issue occurring as against to an issue not occurring.
Total Impact of Risk
Total impact of the risk (TIR) occurring would entail as the impact (I), the risk would cause multiplied by the Risk Ratio. It is essentially how much a bank would be impacted in the chance that the risk did occur. This essentially helps ascertain what is the total value of their investments that may be subject to risk and how it would impact them.
Risk and Reward
The ratio is in simplest terms calculated by dividing the amount of profit the trader expects to have made when the position is closed (i.e. the reward) by the amount he or she stands to lose if the price moves in the unexpected direction (i.e. the risk).
To calculate the total risk ensuing with the total expected return, a favored method is the use of variance or standard deviation. The larger the variance, the larger the standard deviation, the more uncertain the outcome. The standard deviation, E is a measure of average difference between the expected value and the actual value of a random variable (or unseen state of nature).
Types of Risk
The term Risk and the types associated to it would refer to mean financial risk or uncertainty of financial loss. The Reserve Bank of India guidelines issued in Oct. 1999 has identified and categorized the majority of risk into three major categories assumed to be encountered by banks. These belong to the clusters:
- Credit risk
- Market risk
- Operational risk
The type of risks can be fundamentally subdivided in primarily of two types, i.e. Financial and Non-Financial Risk. Financial risks would involve all those aspects which deal mainly with financial aspects of the bank. These can be further subdivided into Credit Risk and Market Risk. Both Credit and Market Risk may be further subdivided.
Non-Financial risks would entail all the risk faced by the bank in its regular workings, i.e. Operational Risk, Strategic Risk, Funding Risk, Political Risk, and Legal Risk.
- ^Srinivas Nallamothu & Fayaz Ahmed. “Risk Management Framework for Indian Banks”.
- ^Sistrom CL, Garvan CW (January 2004). “Proportions, odds, and risk”. Radiology. 230 (1): 12–9. doi:10.1148/radiol.2301031028. PMID 14695382.
- ^Fundamental Analysis Workbook. National Stock Exchange of India Limited.
- ^“Trend and Progress of Banking in India”. Reserve Bank of India. 1996–97, 1998–99, 2001–02 and 2002–03. Check date values in: |year= (help)
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.